Construction Management Chair
COST ENGINEERING (COTM 5202)
Chapter 1
Fundamental Principles of Cost Engineering
Geremew T.
Tuesday, July 27, 2021
Outline
1. Fundamental Principles of Cost Engineering
Introduction
Definitions and Terminology for Cost
Engineers
Cost Engineering Traits
Functions of Cost Engineering in Construction
Considerations in Costing
2
Tuesday, July 27, 2021
AAU-EiABC Cost Engineering, Lecture notes By Geremew T.
1. Introduction
1. 1 Cost Engineering
Cost engineering is concerned with problems of cost estimation,
cost control, and business planning and management science,
including problems of project management, planning, scheduling,
and profitability analysis of engineering projects and processes.
It needs understanding of
Construction Technology
Quantity surveying including understanding of contract
documents and forms of contract
Management Theory and technique: pre contract planning,
tendering policy and the organization of resources
Construction economics
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 3
Tuesday, July 27, 2021
1. Introduction
The broad array of cost engineering topics represent the
intersection of the fields of project management, business
management, and engineering.
Cost Engineering recognizes and focuses on the relationships
between the physical and cost dimensions of whatever is
being “engineered.”
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 4
Tuesday, July 27, 2021
1. Introduction
1.2 Cost Engineers
Cost Engineer: is a qualified professional dedicated to TCM over the
life cycle of a project, facility or manufacturing operation.
Cost Engineers are responsible for carefully managing and
maintaining the integrity of all project capitalizable, and related
non-capitalizable, cost data.
A Cost Engineer determines how much money, resources, and time
a project will require prior to its launch.
Cost Engineers may have different titles such as: cost estimator,
quantity surveyor, parametric analyst, strategic planner,
planner/scheduler, value engineer, cost/schedule engineer, claims
consultant, project manager, or project control lead.
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Tuesday, July 27, 2021
1. Introduction
Required skills and Knowledge to a Cost Engineer
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AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021
Construction Project Life Cycle
Cost estimating techniques and accuracy vary along life cycle
Conceptual/ Design/ Execution/
Definition/ Development Implementation Closing
Feasibility
Cost date/information
Process of the project
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Cost Estimation
Cost Estimating is the process of determining quantities and
predicting or forecasting, within a defined scope, the costs
required to construct and equip a facility.
Cost Estimates are performed at a certain point in time,
based on information available at the time with given
resources and time constraints.
Estimates are based on:
Previously recorded data (historical data)
The estimators own past experience.
Previous experience of others.
Hunches (Intuition).
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021 8
There are many costs associated with construction projects
Land acquisition, including assembly, holding and
improvement
Planning and feasibility studies
Architectural and engineering design
Construction, including materials, equipment and labor
Field supervision of construction
Construction financing including overhead costs
Insurance and taxes during construction
Owner's general office overhead
Equipment and furnishings not included in construction
Inspection and testing
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021 9
Subsequent Operation and Maintenance Costs
Land rent, if applicable
Operating staff
Labor and material for maintenance and repairs
Periodic renovations
Insurance and taxes
Financing costs
Utilities
Owner's other expenses
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Building Costs, Non Building Costs, & Life cycle costs
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021 11
2. Definition and Terminology to Cost Engineers
Construction Cost
Valued consumption of goods /material/ and performance /labor work/ of
different kind and amount for the purpose of the production.
Depreciation/ Depletion Costs
Costs of goods/equipment/ or plant distributed for the whole useful life to
compensate its deterioration to the work.
Interest Value/ Cost of capital
Value of goods foregone by not using resources at their best allocation.
Opportunity cost.
All-in Material Rate
A rate which includes the cost of material delivered to site, waste, unloading,
handling, storage and preparing for use.
All-in Labor Rate
A compounded rate which includes payment to operatives and the costs
which arise directly from the employment of labor.
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AAU-EiABC Cost Engineering, Lecture notes By Geremew T.
2. Definition and Terminology to Cost Engineers
Direct costs, which include the direct cost of materials,
labor as well as equipment; and
Indirect costs, which include but not limited to head
office and site overhead costs.
General Overhead Costs: The cost of administering a
company & providing off-site services.
Site Overhead Costs: The cost of administering a
project and providing general plant, site staff, facilities
and site based services and other items not included in
all-in rates.
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. 13
Tuesday, July 27, 2021
2. Definition and Terminology to Cost Engineers
Mark-up Cost
The sum added to an estimate in respect of the general
overhead costs including profit and risk.
Production Cost
Costs representing the sum of direct costs (all-in costs) and
site overhead costs.
Costs required for production of the works on site.
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AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021
Total Cost = Fixed Cost +Variable Cost
b
i
r
TC=FC+VC
r
FC
Output
Fixed cost is a short-run concept.
All costs are variable in the long run.
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021 15
Cost Categories
i. Fixed Cost,
Do not vary with respect to output (over the
period being considered)
ii. Variable Cost,
Vary with respect to output
b b
i i
r r
r
r VC
FC
0
Output/ Output/
volume volume
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3. Cost Engineering Traits
Cost Engineering shares common traits of the following:
Conflicting Issues of quality, size, performance and cost
o As projects develop, there is continual competition
among issues of quality, size, performance and cost.
o Owners want to have the biggest facility with the best
finishes and systems that will perform over time with least
possible amount of money. With these criteria, it is likely
that conflicts are bound to arise.
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3. Cost Engineering Traits
Cost Engineering combines both science and art:
o Cost estimates are a product of information supplied by the
designer, the owner & the suppliers.
o Experienced Cost Engineers use much judgment in interpreting and
configuring this information.
Cost Engineering does not offer guarantees of costs:
Used properly, however, can be important tool in
bringing a project under or at budget.
The costs developed during design and even at the
bidding stage are almost never the final and complete
costs of the project.
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3. Cost Engineering Traits
Costing can only be as accurate as the information upon
which it is based:
o Cost accuracy depends on document
many factors:
completeness, data base accuracy, the skill and judgment of
the cost engineer.
Cost estimate accuracy increases as the design becomes more
precisely defined:
o A normal feature of the design process is that earlier stages of
design are less precise than later stages.
o Cost information provided at schematic and preliminary
design will by nature be less accurate than the ones provided
at design developments.
AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021 19
3. Cost Engineering Traits
Cost estimate is based on previous estimates:
o A good, accurate estimate does not stand alone.
o It is the product of lessons learned from previous
estimates.
o Costing requires standard computing methodology &
procedures:
o As the design proceeds, the level of details increases.
o Costing as a consequence becomes more complex
reflecting the many different factors that go into each unit
of work.
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4. Functions of Cost Engineering in Construction
Arranging finance, administrative approval & fund
allotment
Guide decision making among alternatives
Provides guidelines to the designer (on material, size
Prepare engineering estimate
Negotiation tool between contracting parties
Help in fixing completion periods
To justify investment : Cost benefit analysis
To invite tenders
For Valuation purposes
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5. Considerations in Costing
Project price is affected by
i. Size of the project,
ii. Quality of the project,
iii. Location of the project,
iv. Construction time, and
v. Other general market conditions.
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AAU-EiABC Cost Engineering, Lecture notes By Geremew T. Tuesday, July 27, 2021 23
